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Our internal and external active portfolio managers, in order of tenure

Active assets (including money market funds):

Patience is necessary: Even the most successful funds can experience frequent or extended periods of underperformance.

Of the 8,738 active equity funds in existence at the start of 2003, 983 were “successful.” But of those, 976 underperformed in at least 4 out of the 15 years ended December 31, 2017, and 533 had at least 3 consecutive years of underperformance.³

Some argue higher costs indicate more skilled management. Our results suggest otherwise. We find no relationship between cost and gross alpha, but there is a clear negative relationship between cost and net alpha because alpha consistently decreases as the expense ratio increases.⁴

1. For the three-year period, 9 of 9 Vanguard money market funds, 43 of 48 bond funds, 31 of 32 balanced funds, and 38 of 44 stock funds, or 121 of 133 Vanguard funds outperformed their peer-group averages. For the five-year period, 9 of 9 Vanguard money market funds, 41 of 44 bond funds, 19 of 21 balanced funds, and 37 of 42 stock funds, or 106 of 116 Vanguard funds outperformed their peer-group averages. For the ten-year period, 9 of 9 Vanguard money market funds, 40 of 44 bond funds, 17 of 19 balanced funds, and 36 of 40 stock funds, or 102 of 112 Vanguard funds outperformed their peer-group averages. Results will vary for other time periods. Only funds with a minimum three-, five-, or ten-year history, respectively, were included in the comparison. Source: Lipper, a Thomson Reuters Company. Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at vanguard.com/performance.

2. Source: Vanguard, based on data as of December 31, 2017.

3. Successful funds are those that survived for the 15 years and also outperformed their prospectus benchmarks. Data are as of December 31, 2017. Our analysis was based on expenses and fund returns for active equity funds available to U.S. investors at the start of the period. All share classes were used to represent a fund when multiple share classes existed. Each fund’s performance was compared with that of its prospectus benchmark. Funds that were merged or liquidated were considered underperformers for the purpose of this analysis. The following fund categories were included: small-cap value, small-cap growth, small-cap blend, mid-cap value, mid-cap growth, mid-cap blend, large-cap value, large-cap growth, and large-cap blend. Sources: Vanguard calculations, based on data from Morningstar, Inc.

5. Because of expenses, most index funds also underperform their benchmarks. Our analysis was based on expenses and fund returns for active equity funds available to U.S. investors at the start of each period. Each fund’s performance was compared with that of its prospectus benchmark. Funds that were merged or liquidated were considered underperformers for the purposes of this analysis. Data includes funds from all share classes. Sources: Vanguard calculations, based on data from Lipper, a Thomson Reuters Company, as of June 30, 2018.

6. Sources: Vanguard and Morningstar, Inc., based on data as of June 30, 2018.

For more information about Vanguard funds, visit institutional.vanguard.com or call 800-523-1036 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

All investments are subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. There may be other material differences between products that must be considered prior to investing.